Thursday, January 30, 2014

Qualcomm 1Q14 Earnings: Great Results, Exiting Position

Qualcomm Inc. reported 1Q14 earnings on January 29 and held
a corresponding conference call at 4:45 E.S.T.Quarterly revenue came in at a record $6.6BB which is substantially
lower than our estimate of $7.0BB and slightly lower than street estimates of
$6.67BB, up 10.0% YoY.Non-GAAP EPS was
reported at $1.26, substantially lower than our estimate of $1.39 and higher
than street estimates of $1.18, representing no growth YoY.Qualcomm’s impressive EPS includes a $0.25
per share gain related to the sale of Omnitracs and a $0.20 per share
impairment in other expenses related to assets in their QMT business.During the fiscal quarter, Qualcomm returned
approximately $1.6BB to stockholders, including $600M in dividends and $1.0BB
in stock purchases.

Newly named CEO Steven Mollenkopf was welcomed in 2014 with strength
in both emerging and developed regions with increased penetration of
smartphones into lower tiers.Global
smartphone adoption continues to be the key driver of royalty revenue
growth.It is believed that emerging
regions smartphone shipments are expected to grow at about 30% CAGR through
2017.Snapdragon-based devices have been
integrated into over 1,350 designs with 500 more in the pipeline.Snapdragon processors have already showed
strong volume growth in flagship tablets including the new LG G Pad, the
Samsung Galaxy Note Pro, and the Samsung Galaxy Tab Pro.

As previously reported in the monthly report, Apple signed a
deal with China Mobile for them to start offering the iPhone.This big deal, along with the new 4G
spectrums licenses that have been issued in China have been driving Qualcomm’s
revenue.Qualcomm also continues to
invest heavily in their leading portfolio of patented technologies applicable to
3G and 4G devices.To compliment this expansion
into emerging markets, Qualcomm has taken actions to manage spending, resulting
in better operating margins.Non-GAAP
R&D and SG&A were below guidance by 3%.

Looking forward towards fiscal 2014, Qualcomm’s next
generation chipset are progressing well and should continue to support their
track record of dominance in the industry.The new Snapdragon processor is expected to ship in devices the first
half of 2014 and will take advantage of Ultra HD.Qualcomm also expects the rollout of their
new 9x35 modem delivering their fourth generation of LTE.Although the aforementioned catalysts imply
growth, Qualcomm is conservative with their estimates, expecting Q2 revenue to
be about $6.1-6.7BB and non-GAAP EPS approximately $1.15-1.25.

While we are pleased with Qualcomm crushing the bottom line,
we are displeased with the light guidance and the probe that China’s National
Development and Reform Commission has launched.It is believed that Qualcomm has violated an anti-trust law and as a result
could face fines up to or exceeding $1BB.In comparison to our above consensus estimates, light guidance and a
potentially crippling fine leave us unconfident in multiple expansion and force
us to exit our position.